Private Equity Liquidity Crunch and the Secondaries Solution: The LP Perspective (2024–2025)
Limited partners (LPs) in private equity are facing a pronounced liquidity crunch that is reshaping allocation strategies, exit preferences, and the secondary market’s role. With capital calls continuing and distributions slowing, LPs are being forced into tough choices and creative solutions to manage their portfolios.
Slower Exits and a Distribution Drought
In 2024, distributions as a portion of net asset value (NAV) fell to just 11%, the lowest level in over a decade. This extended cash crunch is driven by longer holding periods—now averaging nearly 7 years—and a backlog of companies unable to exit at favourable prices. Funds vintage 2018, for example, have returned only 0.6x paid-in capital, compared to the historical 0.8x at this stage, leaving about 20% of anticipated liquidity missing.
Cash returns to LPs (as measured by DPI) remain well below norms for younger vintages (2019–2021), with paper valuations holding up, but realised cash scarce. The result is a build-up of aging portfolios and investor pressure on GPs to turn unrealised value into real distributions—even if that means accepting lower valuations.
Preferences: Mainstream Exits vs. Structured Alternatives
LP sentiment leans strongly toward traditional, mainstream exits—sales and IPOs—over complex alternatives like dividend recaps or continuation funds, even if that means realising at discounts. Over 60% of LPs polled in H1 2025 said they would prefer mainstream exits at a discount, rather than accept ongoing illiquidity or highly structured solutions.
For example, Mainstream Renewable Power’s 2025 sale of a 675 MW Colombian renewables portfolio was a high-profile recent traditional exit offering urgent liquidity, even while market sentiment and pricing remained subdued. However, as the exit environment remains bottlenecked, LPs have turned increasingly to the growing secondaries market.
The Rise of Secondaries as a Liquidity Valve
The secondary market has surged in relevance: volumes hit a record $162 billion in 2024 and are expected to reach $170+ billion in 2025. LP-led transactions now comprise over half of secondary activity, with pension and sovereign funds among the large, active sellers. Pricing has also improved, with discounts narrowing from 85% to 89% of NAV in late 2024, reflecting robust demand for private assets.
Recent Real-World LP-Led Secondaries
- US University Endowments: In 2024–2025, several major US endowments sold significant private equity portfolios on the secondary market for the first time, favouring liquidity over waiting for slower exits, even if it meant moderate discounts to NAV.
- Pension and Sovereign Wealth Funds: These investors have driven the largest LP-led portfolios to market in 2025, strategically using secondaries to unlock capital needed for commitments, rebalancing, or to alleviate over-allocation due to lagging distributions.
- Repeat Institutional Sellers: Many funds selling in 2025 had already tapped the secondaries market in previous years, showing the normalisation of this option as a routine liquidity management tool rather than a last resort move.
The Trade-Off for LPs: Speed and Discounts vs. Patience and Uncertainty
LPs face a hard choice: accept a discount now for certainty and cash or hold out for a better market in the hope of higher returns. The secondary market provides a platform for flexibility and active rebalancing, but even as discounts narrow, selling below carrying value tests risk appetite, governance, and long-term strategy.
Big Question:
If you were in the LP seat, would you lock in a lower price now for fast liquidity, or wait for the market to improve? What drives your decision, portfolio strategy, governance constraints, or risk appetite?
Conclusion
The liquidity crunch in private equity has redefined how LPs and GPs engage with portfolio management, liquidity planning, and exit timing. The rise of the secondaries market gives investors a powerful, mainstream release valve, fostering increased flexibility and resilience in private markets. Nevertheless, the choice between securing cash today at a discount, or waiting with patience and risk for better terms, remains at the heart of the LP’s strategic dilemma for 2025.
Citation:
2. https://alterdomus.com/insight/private-markets-mid-year-review-2025/
3. https://www.bain.com/insights/private-equity-midyear-report-2025/
4. https://www.withintelligence.com/insights/private-equity-in-2025/
6. https://www.withintelligence.com/insights/sps-private-equity-harvest-report-2025/
7. https://www.economist.com/special-report/2025/05/23/what-it-means-to-be-illiquid
9. https://www.mainstreamrp.com/news/mainstream-sells-675-mw-colombian-portfolio-to-celsia/
10. https://alterdomus.com/insight/2025-mid-market-review/
11. https://www.ai-cio.com/news/lp-gp-led-secondaries-grow-to-record-volumes-in-2025/
12. https://www.stepstonegroup.com/news-insights/1000-words-or-less-secondaries-to-the-rescue/
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